Posts Tagged ‘Economics’

With the onset of the election, the economy continues to remain the number one issue on voters’ minds. President Obama would have them believe he turned the economy around from the abyss after the financial crisis of 2008, and were now on a forward path because of his policies. The problem with this story is that it doesn’t stand up to scrutiny. Almost every broad-based measurement of economic well-being shows stagnation or decline over his term. Given this, voters should look towards the Republican nominee for president, Mitt Romney, to lead this country towards economic revival.

For starters, look at the jobs market. 23 million Americans continue to remain unemployed, underemployed or stopped looking for work. The only reason the unemployment rate declined from its recessionary peak of 10% to its current level of 8.1% is from millions of Americans dropping out of the labor force. Since the unemployment rate is calculated by dividing the amount of people unemployed by the labor force, all it takes for the unemployment rate to drop is for individuals to become discouraged and stop registering their unemployed status to the government. The labor force participation rate stands at a 60 year low for males. Instead of finding a job millions of Americans have found it more convenient to live off the current administration’s expansion of the social safety net. In fact, the unemployment rate calculated with the same labor force participation rate held on January 2009 would be through the roof at 11.3%.

There has been 4.5 million private sector jobs added over the past 30 months that Obama likes to talk about. But, compared to other recoveries after a severe recession, 4.5 million jobs is disappointing to say the least. If this jobs recovery kept up with the pace of the Reagan recovery, roughly 7.5 million more people would have a job. Based on the past 20 years of job growth our economy is currently 13 million jobs below its trend line.

On top of that, a recent study demonstrated that most of the jobs lost during the recession were middle-class jobs while majority of the new jobs are lower class. In other words, not only have the quantity of jobs added under Obama undershot expectations, but they have also suffered in quality.

Given the dismal state of job and income growth, it’s no surprise that household incomes have actually fallen more during the so-called recovery than the actual recession. Under the latest estimations, household incomes fell 2.6% during the recessionary years and by 4.8% since.

Though the scariest picture of them all is the coming sovereign debt crisis this country faces similar to the situation facing many European countries. The current administration’s appetite for debt fueled government spending in the name of stimulus and wealth redistribution may be the final straw that breaks the back of our economy, equalizing us with the debt ridden, depressed economies of Europe. Since taking office, the Obama administration has run four consecutive trillion dollar deficits, increasing the national debt by 5.6 trillion in less than four years. The national debt as a percentage of GDP, which measures our liabilities against assets, has risen from an already too high rate of 70% when Obama took office, to over a whopping 100%. Under current budget projections, this ratio only worsens under an Obama second term, as the national debt continues to grow faster than the economy.

In short, economic statistics clearly reveal that the US economy has stagnated under the current administration’s policies and faces financial ruin in the near future if we don’t reverse course. Ultimately, voters will decide whether we stay with the status quo of misery or turn the corner and select a new set of policies with a Romney administration, which will foster prosperity that this country is so used to.

Daniel Wilson is a recent graduate of James Madison University and holds a degree in economics.

With an election rolling around the corner, President Obama is out on the campaign trail touting himself as an economic savior for the homeland. Though, it’s hard to imagine how anybody could possibly run on an economic record as lousy as his own. After all, the majority of Americans still believe the economy is in a recession.

Technically, the recession ended in the second quarter of 2009, but the so-called recovery has been too weak to reverse much of the catastrophic damage done to the average household during the recent economic collapse. For example, since the alleged recovery began real gross domestic product growth has averaged an anemic 2.4 percent, with 1.9 percent for the first quarter of 2012.

Given the depth of the economic contraction from the financial crisis, economists would expect a much larger rebound in growth rates. Historical evidence compiled by many economists, including Milton Friedman, clearly shows that deep economic downturns are followed by rapid expansions. For instance, at this same point in the 1980s recovery following the deep contraction at the start of the decade, GDP growth averaged a much more robust rate of 6 percent.

What about on the jobs front? The picture remains the same, no real recovery to speak of. True, the private sector has added 4 .3 million jobs over the past 27 months, which is around 160,000 jobs a month. However, that’s hardly enough jobs to keep up with the growth in the labor force and private sector jobs are still 4.5 million below their 2008 peak. Hence, employment statistics continue to remain in the dumps.

For instance, the unemployment rate has been above 8 percent for over 40 consecutive months, the longest since the 1930s. The labor presentation rate has plummeted to multi-decade lows as millions of discouraged workers have stopped looking for work and are no longer part of the official unemployment rate. In fact, if you calculate the unemployment rate using the same labor participation rate held on January 2009, the unemployment rate would be 10.9 percent.

So what’s holding back the economy? John Taylor, a prominent economist from Stanford University, believes the current administration is most to blame through their interventionist economic policies. Taylor argues that the increased regulatory burden of government over the last few years, including but not limited to, Obama care, Dodd- Frank, an overzealous EPA and NLRB, have stifled business expansion, causing resources to remain idle instead of being used in productive manners that foster job creation. To validate this view, a recent poll done by the Chamber of Commerce found that 74 percent of small businesses say that Obama Care makes it harder for their business to add employees. Another recent poll by Gallup found that the number one problem small businesses face is complying with government regulations. Just since 2008, the amount of federal workers employed in regulatory activities has increased by 20 percent.

Another blatant impediment to a genuine economic recovery is the profligate spending in Washington D.C. The increase in federal outlays since 2008 did not stimulate the economy, but rather sedated it. The more the government spends, the less the private sector can invest. As Milton Friedman put it, a government taxes what it spends, so spending increases have the real effect of higher tax rates on the private sector. Since governments have no resources of their own, they have to obtain their fundings by robbing the private sector of its capital. That is, when governments spend money, whether through taxing, borrowing, or inflating they displace resources from the productive sector of our economy and squander it on wasteful projects, such as Solyndra.

A recovery built to last must come from the only productive part of our economy, which is the private sector, not the public sector. In order to allow the private economy to fire on all cylinders, producing a recovery strong enough to reverse the damage done from the recent financial meltdown, the federal government must remove its grip on the economy with large-scale cuts in spending and onerous regulations.

Daniel Wilson is a recent graduate of James Madison University and holds a degree in economics.

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In the name of class warfare politics, President Obama released a budget with $1.7 trillion in tax hikes over the next decade targeting successful earners, including small businesses, corporations and entrepreneurs. These taxes may only apply to individuals and businesses earning more than $200,000 a year, but will adversely affect every American, including college students.

In a jobless recovery with over 13 million Americans out of work, the last thing you want to do is impose higher marginal tax rates on job creators. Around 75 percent of tax filers in the highest tax bracket report business income, according to the Tax Foundation. [1] Higher taxes on businesses will most certainly destroy jobs. Businesses will have less after-tax income to expand production and employment. In addition, the incentives to make new investments in potential breakthroughs are minimized since you’re asking investors to take risks for a diminished rate of return from inflated confiscatory tax rates.

Take a look at the capital gains tax which Obama wants to raise from 15 to 24 percent. Capital gains taxes are paid whenever you sell an asset, such as a bond or a stock, for a profit. Higher taxes on capital gains will miss allocate resources by encouraging consumption over investing. Since investments are now being taxed at a higher rate, consumption becomes more attractive. Currently, the U.S. economy desperately lacks capital investments and way over consumes, so this only worsens that imbalance. Also, a higher capital gains tax chases capital overseas to countries like Switzerland that have no capital gains tax at all, destroying American jobs in the process. Lastly, everybody who owns stocks, which is roughly half of all Americans, will have a devalued portfolio from a higher capital gains tax. The higher tax lowers the reward from owning a stock, which then reduces the demand for stocks, causing the entire stock market to be worth less. Since savings and investments are the key to long-term economic growth the capital gains tax should be abolished, not raised.

Even though most economists believe higher taxes retard economic prosperity, the Obama administration is sold on the belief that the rich in this country, such as Warren Buffett and Mitt Romney, need to pay an elevated tax rate. Obama wrongfully claims that very wealthy individuals earning their income through capital gains and dividends get off with a lower tax rate than a secretary. This common fallacy completely ignores the double taxation of corporate income. Capital gains and dividends are taxed at a preferential rate of 15 percent because that same income has already been taxed at a rate of 35 percent at the corporate level. In other words, when a corporation earns a profit it has to pay corporate taxes on its earnings and then when the retained earnings are distributed to shareholders through dividends the income is taxed again at a rate of 15 percent. In actuality, as The Wall Street Journal recently pointed out on January 27, 2012, Romney and Buffett have a tax rate closer to 40 percent.

As far as the rich not paying their fair share, the top 1 percent pays nearly 40 percent of all the income taxes while the bottom 45 percent pays nothing, according to the IRS. Also, a study by the OECD in 2008 showed that the richest 10 percent of households in the United States have the highest ratio of income taxes paid to the share of income earned, giving the U.S. the most progressive income tax system in the industrialized world.

Higher taxes on productive behavior is detrimental for society as a whole, living standards and economic growth become compromised when innovations and hard work get penalized by draconian tax rates. The rich already pay more than their fair share, and asking them to pay additional taxes will only derail the economy.

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Sure, many people have already seen these two videos. After all, the first is over a year old. Nevertheless, I’d like to draw your attention to them in case you have not. Although one doesn’t typically see rap music and economic discourse combined, the folks at Econ Stories have done a fine job bringing the two together, resulting in a product that is both entertaining and informative.

After you watch (or re-watch) them both, I invite you to scroll down below for a bit more commentary.

Much like the majority of the populace, with the exception of a few classes at William & Mary, I haven’t had much in the way of formal study of economic theory. Therefore, after watching these videos, I drove over to Barnes & Noble to pick up a copy of Hayek’s The Road to Serfdom.

As the videos illustrate, John Keynes is much more well-known than Friedrich Hayek and his ideas seem to be in fashion with those in power. We all are witness to the massive federal spending and their resulting deficits combined with bailouts of private industries and stimulus programs. During the 2008 Presidential debates, Obama and McCain seemed to joust for position as to who was the most Keynesian.

Even more than the first, Round 2 suggests that Hayek’s positions are superior to Keynes. After all, it seems fairly obvious that inflation destroys any incentive to save and any current debt must one day be repaid by future generations in either treasure or blood. Therefore, we have to ask ourselves, do we expect the free market to create greater prosperity or should we leave it to the bankers to steer a prudent course? Do we want currency tied to some fixed asset like gold or silver, or something that can be easily overprinted and thus rapidly lose value? Regardless of any perceived merit of Hayek, those in power in the federal government seem hell-bent to continue a Keynesian model.

So, are we all Keynesians, as Milton Friedman stated in 1965, or, as a result of these bailouts and quantitative easing, have we all become socialists as Newsweek suggested back in 2009? Either way, are the two mutually exclusive?

Give our current economic mess, isn’t it time for a change?

My favorite line from the whole production is, “capitalism is about profit and loss. You bailout the losers, there is no end to the cost”. Certainly food for thought.

You can find a much more in-depth discussion of both Keynes & Hayek with the Econ Stories podcast on the iTunes store. Best of all, it is absolutely free!